The opinion of the court was delivered by: Conboy, District Judge:
Plaintiff, Richard Farr ("Farr"), as personal representative
for the estate of his mother, Sarah Farr, brings this action
seeking damages for violations of federal security statutes and
for state-law torts against Shearson Lehman Hutton, Inc., the
successor in interest to E.F. Hutton & Company,
Inc.*fn1 This action centers on Sarah Farr's investment of
$125,000 in two oil and gas limited partnerships, the
Hutton/Indian Wells 1983 Energy Income Fund, Ltd. ("Indian
Wells '83") and the Hutton/Indian Wells 1984 Energy Income
Fund, Ltd. ("Indian Wells '84"). Farr claims that a broker
employed by defendant recommended these investments to Mrs.
Farr, with knowledge that they were unsuitable for her stated
investment strategy, and that the Funds have performed very
poorly, failing to return the initial investment. The Complaint
alleges violations of Section 10(b) of the Securities Exchange
Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated
thereunder, 17 C.F.R. § 240.10b-5, (Count One), Section 17(a)
of the Securities Act of 1933, 15 U.S.C. § 77q(a), (Count Two),
and state common-law claims for fraud (Count Three), negligence
(Count Four), and breach of fiduciary duty (Count Five).
Because Sarah Farr was a citizen of Alaska,*fn2 and defendant
is a citizen of New York, diversity jurisdiction exists as a
separate jurisdictional basis for the state-law claims.
Defendant now moves for summary judgment contending that the
written offering materials adequately disclosed all relevant
risks of the investments, that there is no evidence of any oral
misrepresentations made to Mrs. Farr, that there is no private
cause of action under Section 17(a), and that the statute of
limitations bars the Section 10(b) and the state law claims.
Because we believe there is no private cause of action under
Section 17(a) and because the statute of limitations bars the
other claims, we grant defendant's motion.
The following facts are not in dispute. Sarah Farr moved to
Anchorage, Alaska in 1980. Defendant's Rule 3(g) Statement of
Undisputed Material Facts ("3(g) Stmt.") ¶ 12. In 1981, she
opened an account with Todd Gerber, an account executive in the
Anchorage office of E.F. Hutton, Inc. In the Fall of 1983,
Gerber recommended that Sarah Farr invest a portion of her
portfolio in Indian Wells '83. Gerber Affid. ¶¶ 5, 6. At that
time Mrs. Farr's portfolio was worth approximately $462,000,
not including an earlier $100,000 investment in a limited
partnership. Ex. E to Gerber Affid. On November 17, 1983 Sarah
Farr purchased 100 units of Indian Wells '83 for a purchase
price of $50,000. 3(g) Stmt. ¶ 1. Prior to making this
investment, Mrs. Farr was provided with the Prospectus for
Indian Wells '83. 3(g) Stmt. ¶ 2. She was also supplied with a
January 1984 Supplement to the Indian Wells 1983 Prospectus in
early 1984. 3(g) Stmt. ¶ 6.*fn3 In 1984, after receiving a
letter from Indian Wells informing her of the creation of
Indian Wells '84, Mrs. Farr contacted Gerber with
an unsolicited order to invest in Indian Wells '84. 3(g) Stmt.
¶ 7. Mrs. Farr requested Gerber to invest $100,000 in Indian
Wells '84. Gerber attempted to persuade her that she should not
invest that large a sum in Indian Wells '84 and tried to
convince her that she should invest no more than $50,000.
Gerber Dep. at 145-148. Mrs. Farr agreed to purchase 150 units
of Indian Wells '84 for $75,000, which she did on October 19,
1984. 3(g) Stmt. ¶ 9. Prior to investing in Indian Wells '84,
Mrs. Farr received the prospectus for Indian Wells '84. 3(g)
Stmt. ¶ 8.
Mrs. Farr died in May 1985, and Richard Farr was named the
personal representative of her estate. 3(g) Stmt. ¶ 12; Farr
Dep. at 17. Correspondence about the Indian Wells investments
was forwarded to Farr at his home in Alabama, where it was
received and read by Farr. Farr dep. at 67, 70, 82. Indian
Wells '83 and '84 sent to its limited partners quarterly and
annual reports, which Farr began receiving no later than May 8,
1986. Farr dep. 69-70, 78-80. These reports disclosed the
amount of quarterly distribution, if any. See McDonough Affid.
Exs. F, G, H, I, J, K. For Indian Wells '83 the distribution
per $500 unit for the first quarter of 1986 was $7.76; for the
second quarter there was no distribution; for the third quarter
there was a net distribution of $1.20. Exs. F, G, H. In annual
reports dated May 19, 1987, Exs. J and K, Indian Wells '83 and
'84 listed the price at which they would buy back units from
the limited partners, as provided in the prospectus. The
buy-back (or "presentment") price, established by an
independent appraiser, was $34.36 per $500.00 unit for Indian
Wells '83, and $314.92 per $500 unit for Indian Wells '84. Id.
The annual report also disclosed that total distributions
through the end of 1986 for Indian Wells '83 had been $150.00,
but distributions for 1986 had been only $12.34 — a 2.46%
annual distribution rate for 1986. Farr received these reports,
but did not read them in detail. Farr Dep. at 82.
Because of the correspondence from Indian Wells, Farr knew
that the investments were not doing well, and he felt a
continuing concern about the investments. Farr Dep. at 70-72.
He made no inquiry of Gerber or anyone else however, until he
received a letter from Beigel & Sandler, now his attorneys in
this action, which had been sent out to purchasers of Indian
Wells units, apparently informing them of the possibility of
joining in litigation against the sellers of the units. Farr
Dep. at 34-39, 70-73, 82-83. After receiving this letter, Farr
contacted Gerber for advice on whether to join the litigation.
Farr Dep. at 34-39. Farr requested from Gerber a copy of each
prospectus, which he never received. Farr Dep. at 58-59. This
action was filed on October 13, 1989.
The complaint sets out allegations that Gerber made certain
fraudulent statements and omissions to Mrs. Farr at the time of
her purchase of Indian Wells units. (See Cmpl't ¶ 24 at 6-7).
Defendant in this motion for summary judgment contends that
there is no factual basis for plaintiff's claim of
misrepresentation, pointing to the deposition testimony of Mr.
Farr (at 31, 47-54) which reveals that this complaint was filed
before he had read it, and that Farr has no real basis for
believing the specified statements were made. Plaintiff has
tacitly conceded the point, and instead now promotes his claim
as one for "unsuitability" — i.e. a claim that the Indian
Wells investments were unsuitable for Mrs. Farr's investment
needs, and that Gerber, knowing that they were unsuitable,
recommended them to her anyway. We will address this action as
one based on a claim of unsuitability.
Defendant contends that no private right of action should be
Section 17(a), 15 U.S.C. § 77q(a), and that plaintiff's second
claim should therefore be dismissed. Plaintiff relies upon
Kirshner v. United States, 603 F.2d 234 (2d Cir. 1978) in
contending the opposite. As we have previously held, we do not
believe that there is a private right of action under Section
17(a). Friedman v. Arizona World Nurseries, 730 F. Supp. 521,
545 (S.D.N.Y. 1990), aff'd, 927 F.2d 594 (2d Cir. 1991); Tobias
v. City National Bank and Trust Co., 709 F. Supp. 1266, 1274-76
(S.D.N.Y. 1989). We see no reason to change that view at this
time, and plaintiff's second claim is dismissed with prejudice.
B. Statute of Limitations
1. "One Year/Three Year" Rule
The Second Circuit has recently held that the uniform statute
of limitations applicable to actions brought under Section
10(b), 15 U.S.C. § 78j(b), and Rule 10b-5,
17 C.F.R. § 240.10b-5, is one year from the date of discovery of the claim,
but in no event more than three years from the date of accrual
(the "one year/three year" rule). Ceres Partners v. GEL
Associates, 918 F.2d 349 (2nd Cir. 1990). Under the Ceres rule,
plaintiff's Section 10(b) claim is clearly time-barred here.
That claim accrued no later than November 17, 1983 with respect
to the 1983 Fund, and October 19, 1984 with respect to the 1984
Fund, the dates on which Mrs. Farr purchased her ...